U.S. retailers feel the pinch as frugal shoppers curb spending

Siddharth Cavale, Sruthi Ramakrishnan

5 Min Read

(Reuters) - Weak results from the likes of Wal-Mart Stores Inc (WMT.N) and Macy’s Inc (M.N) are the latest sign less affluent U.S. consumers are still pinching their pennies and the trend appears to be hurting upmarket retailers as well.

An employee cleans a clothes rack at the Walmart Supercenter in Bentonville, Arkansas June 5, 2014. The Walmart Stores Inc. annual shareholder meeting takes place June 6, 2014. REUTERS/Rick Wilking

A number of large U.S. retailers who cater to low and middle income consumers reported disappointing quarterly comparable sales this week, pointing to a cutback in spending and a shift in preferences to stores nearer to home.

“Consumers are still concerned about cost of living and employment...overall we are seeing no changes in the consumer than what we have seen in the last few quarters,” Wal-Mart Chief Financial Officer Charles Holley said on Thursday.

Wal-Mart cut its profit forecast for the year, citing higher healthcare and online investment costs, but also cautioned that heavy discounting would continue into the holiday season to draw in its shoppers, many of whom depend on government assistance.

Even department store operator Macy’s, which caters to a more affluent clientele, lowered its same-store sales forecast for the year.

“Even though the job market has picked up, income growth is very weak. We are adding jobs but average earnings aren’t growing very rapidly,” Robert Brusca, chief economist at consulting firm Fact and Opinion Economics, said in a phone interview.

Amid the general gloom, one surprising glimmer of hope came from struggling department store chain J.C. Penney Co Inc (JCP.N), which reported a 5 percent rise in quarterly sales and a narrower loss.

SPENDING RESTRAINT

Even McDonald’s Corp (MCD.N), which sells burgers and fries for as little as a dollar, has struggled to grow sales at established restaurants in the United States since November 2013. Same-restaurant sales at home fell 3.2 percent in July.

The Labor Department’s monthly employment report showed more than 200,000 jobs created for the sixth straight month in July.

But, Brusca said, a lot of the jobs are being added in low-income brackets.

Spending would be much greater if wages increased for the people already employed, he said.

American workers, on average, earned $24.45 an hour in July, up only a penny from June, the Labor Department’s data showed.

Over the last year, wages have grown just 2 percent, in keeping with where they have been stuck since late 2009. Before then, hourly earnings typically rose 3 percent or 4 percent a year.

The restraint is hurting retailers in the “affordable luxury” space such as Michael Kors Holdings Ltd (KORS.N) and Kate Spade & Co’s KATE.N, which have had to fall back on discounts to push their handbags and other accessories.

Kate Spade shares lost nearly a quarter of their value on Tuesday after the retailer said gross margins were being hit by intense competition, particularly in its low-end Kate Spade Saturday brand.

Michael Kors’s quarterly margins were squeezed by increased discounting to clear inventory and watchmaker Fossil Inc (FOSL.O) announced lower profits as declining mall traffic, a problem for many retailers, took its toll.

The rise of e-commerce has played a role in the weakness of brick and mortar retailers as well, although Amazon.com Inc (AMZN.O) is struggling to reap a bottom-line boost from its surging sales.

Price cuts have now become a necessity for many retailers as well, to be able “to compete with the aggressive department store promotions” and get customers “to purchase in an otherwise stagnant fashion environment,” Wedbush analysts wrote in a note.

In addition to McDonald’s, the U.S. consumer’s reluctance to spend has also hit some of the country’s more upscale “fast-casual” eateries, where many chains have been feeling the squeeze even as Chipotle Mexican Grill Inc (CMG.N) has prospered.

Noodles & Co (NDLS.O), a full-service restaurant chain, on Wednesday slashed full-year sales forecasts, in part for a drop in frugal customers visiting its restaurants.